The Emergence of Global Firms and Its Consequences

Both authors, Srnieck and Bonacich and Wilson, tell us about the emergence of global firms, whether it be through platforms, such as Uber, or large logistics firms with global supply chains like Wal-Mart.

Global firms can be described as companies that operate in multiple countries across continental borders. Such global companies are also known as multinational corporations (MNC’s). Despite both authors exploring two different types of businesses, they both ultimately agree that there are now ever fewer but larger global firms. In what follows, we are going to delve into the impact that the rise of global firms has had on business and society in both developing and developed nations.

We will explore whether the emergence of such powerhouse firms is beneficial as it creates wealth and job opportunities around the world as well as possessing economies of scale that allow consumers to benefit from lower average costs and prices or whether these global firms displace independent local businesses and use their power to stagnate and exploit developing nations. Jamaica and its economy fell victim to the emergence of global firms and the political influence they possess. The case of Jamaica and the International Monetary Fund (IMF) brings to light the detrimental impact that multi-national corporations can have on developing nations. Jamaica having a relatively oil intensive economy because of the bauxite industry meant that the harsh reality of the seventies oil crisis and falling revenues within the bauxite industry had led Jamaica into debt as the price of imported goods increased and exported goods fell.

This resulted in the Prime Minister seeking help and getting a loan from the International Monetary Fund (IMF) who in turn imposed a structural adjustment program which lead to austerity and the opening of its markets. “This assistance did not do much to remedy the salient weaknesses of the island’s economy which now faced added pressures from a more globalised economy and an international free trade model” (Wesley Hughes, 24 June 2007. ‘Strategic structural transformation’. Jamaica Gleaner.) Voting power within the IMF is determined by how much money each country contributes, subsequently putting developed nations such as the United State in a more powerful position in decision making and consequently the needs of investors and corporations may be put ahead of developing countries. The agriculture industry in Jamaica suffered a great deal owing to their interactions with the IMF. One of the terms of the loan was that they had to the lower tariffs on imported goods, as a result the local dairy industry collapsed due to the import of cheaper powdered milk from the US which was able to undercut domestic Jamaican farmers. This coupled with the impact of globalisation, left key industries unprofitable, as Revolution Newspaper outlined: ‘Through the 1970s and ’80s, the Jamaican government signed on to billions of dollars in loans from those institutions. One of the many onerous conditions of this debt was that Jamaica drastically lower the tariffs on imports, including imported agricultural products. This led to a flood of imported food into Jamaica—everything from potatoes, vegetables, and fruit to meat and milk. Produced by agribusinesses in the U.S. and other countries, often with government subsidies, the imports were cheaper than locally produced food. Jamaican farmers were not able to compete, and many were forced out of agriculture altogether.’

Revolution Newspaper. 2013. ‘United States of Amnesia: “Forgetting” How the IMF Ruined Agriculture in Jamaica’. 18 August 2013. Lowering import duties makes it less expensive for other countries to export food and other products to Jamaica. Jamaican officials may have believed that trade liberalization would enable them to import cheaper priced food for low-income consumers, pressure inefficient farmers to leave the sector, and make other farmers more competitive. However, there seems to have been no plan in place for providing displaced farmers with productive work and, as a small island economy, any attempts to diversify agricultural products takes time and resources away from a government that must spend nearly 60 percent of its revenues paying down the debt incurred from World Bank and IMF loans. Former vice president of the World Bank, Joseph Stiglitz, says in his book ‘Globalisation and its discontents’ that free market ideals “blurs clear thinking” about how to tackle problems within the global economy. Although, he does make the point that there was a beneficial aspect with the opening up of Jamaica’s milk industry. “Opening up the Jamaican milk market to US imports in 1992 may have hurt local dairy farmers, but it also meant poor children could get milk more cheaply,” he wrote. Furthermore, expanding on that point, a lot of Jamaica’s population do not have access to the refrigeration necessary to maintain the fresh milk provided by local farmers, so the liberalisation of trade meant that the poor had access to a lot more goods, that as a result of western innovation, were able to improve their living standards. That said, it nevertheless left the countries agriculture market in ruins.

The difficulties for Jamaica persisted when the banana industry was forced into decline after the USA, who do not themselves export bananas, complained to the World Trade Organisation about “unfair” labour practices and won, despite the fact the Dole Food Company (a US multinational company) had a monopoly on a considerable amount of the banana trade. “US multinationals which control the Latin American banana crop hold three-quarters of the EU market” compared to the 7% that come from the Caribbean. The US government is also pressurised by powerful US-based multinationals which dominate the Latin American banana industry. The Clinton administration took the banana wars to the WTO within 24 hours of Chiquita Brands, a powerful, previously Republican-supporting banana multinational, making a $500,000 donation to the Democratic Party.” Patrick Barkham, March 5 1999. ‘The banana wars explained’. The Guardian Newspaper. Such cases highlight the unfortunate consequences in developing countries of the political influence and power of global firms that they merely cannot compete with. The effects of the emergence of global firms on Jamaica was not limited to agriculture, and has affected the country in terms of people and culture, according to Jack Harper. “… the imposition of multinational corporations and nations further complicate and destabilise the Jamaican life,” Harper wrote. “Emigration has been a safety valve for the island. Now, more Jamaicans live outside the country than within, sending yearly remittances of $1.3 billion back to families.”

Extrapolating from this, we can see some of the socio-economic effects that have arisen with an inconceivable number of native Jamaicans relying on remittances from abroad to sustain them in order to afford basic necessities. We can also infer that due to the lack of industry and jobs it has forced mass economic migration, where people have moved abroad in order to improve their standard of life, seek out work and as aforementioned earn money to send back to their families.

On a more local scale, we can explore the impact that the emergence of global firms is having in the western world with more and more independent businesses closing down as large global firms take control of the high street. Srnicek spoke about the rise of platforms as large monopolistic firms; platform businesses, such as Amazon, AirBnb and Uber have become these large monopolistic firms as a result of the insurmountable network effects, where “the utility that a user receives from a particular service directly increases with an increasing number of other users” (Rohlfs 1974; Katz and Shapiro 1985), that have come about due to the ease and convenience that they provide when connecting different users, e.g. supplier and consumer, via technology. The rise of platform monopolies and the dominance they hold has a multitude of consequences for business. On one side, they are highly beneficial for the consumer as they have heavily reduced transaction costs, the cost associated with exchange of goods or services, when connecting them with the good or service that they need. For example, Uber (“A location-based app that makes hiring an on-demand private driver easy”) is review-based and can automatically detect your location, send you a driver and take the payment out of your account online, whereas using a traditional cab service has many transaction costs, such as the informational cost of researching a cab service and finding out a price, as well as the cost of researching whether or not they provide a good quality service. All these costs highlight the ease and convenience for the consumer that arise when using such platforms and how they are, in fact, beneficial for society.

However, when you look at the consequences for business – it isn’t as positive. In this ever-evolving world it is fair to recognise that we are in the “age of platforms”, the benefits they provide the consumer with are difficult to compete with for local businesses and inevitably these businesses are suffering and being forced out of the market. “Since the ride-hailing services began operating in Southern California three years ago, the number of L.A. taxi trips arranged in advance has fallen by 42%, according to city records, and the total number of trips has plummeted by nearly 30%.” LAURA J. NELSON. APR 14, 2016. Uber and Lyft have devastated L.A.'s taxi industry, city records show. LA Times. Los Angeles city records show that Uber, and similar concept platform ‘Lyft’, have devastated the taxi industry, whose prices are regulated by local government, as they struggle to compete with “cheaper, more nimble” platforms.

A similar displacement of independent businesses, such as coffee shops and local grocery stores, is happening as they struggle to compete with multinational companies such as Starbucks and Wal-mart. The economies of scale available to these MNCs allow the firms to offer the consumer the lowest prices and deals whilst undercutting local businesses and forcing them out of the market. However, it is argued that although they displace some businesses, the emergence of these global companies can be positive for surrounding businesses through external economies of scale, as they attract consumers to the area and increase foot fall, thus the number of potential customers improves and can prove to be beneficial to businesses. Additionally, these MNCs create a significant amount of jobs for the local people which subsequently helps stimulate the local economy and help local businesses as people have more spending power. Having explored the consequences for business and society of the emergence of global firms, a reoccurring pattern I have noticed highlights that the growth and development of such multinational corporations has been highly beneficial and positive for society and thus consumers as they inevitably improve quality of life by being able to offer lower prices, improved efficiency, ease and convenience as well as creating lots of jobs for the people.

The benefits for business, however, are not as promising. We have seen that the emergence of these global firms and the power they possess through political influence, the ability to influence law, the economic power they have and the economies of scale that are available to a corporation when they are operating at such a global level have made it near impossible for businesses to compete in both developing and developed nations and it has shown that if a business has not being completely forced out of the market, they have been heavily marginalised and business has suffered. In conclusion, it is hard to say whether the benefits outweigh the negative consequences of global firms.

However, I believe that more needs to be done by government in the form of regulations such as subsidies for local businesses and higher taxes for global corporations in order to aid a more equal playing ground where everybody can benefit.

References

1. http://old.jamaica-gleaner.com/gleaner/20070624/focus/focus6.html http://revcom.us/a/313/united-states-of-amnesia-forgetting-how-IMF-ruined-agriculture-in-Jamaica-en.html https://www.theguardian.com/world/1999/mar/05/eu.wto3

2. Stiglitz, J. (2003) Globalisation and Its Discontents. New Ed. Penguin. [Accessed January 8 2016]

3. Harper, J. (2003) ‘Globalisation: Its Effects in Jamaica’, Global Exchange, May [Online]. Available at: http://www.globalexchange.org/country/jamaica/economy  [Accessed January 8 2016]

4. Rohlfs, Jeffrey (1974): A Theory of Interdependent Demand for a Communications Service, Bell Journal of Economics and Management Science 5, 16-37.

5. Katz, Michael and Carl Shapiro (1985): Network Externalities, Competition, and Compatibility, American Economic Review 70, 950-959. http://beta.latimes.com/local/lanow/la-me-ln-uber-lyft-taxis-la-20160413-story.html

6. Bonacich, E., & Wilson, J.B. (2008). Getting the Goods: Ports, Labor, and the Logistics Revolution. Ithaca: Cornell University Press.

7. Srnicek, N. (2017). Platform Capitalism. Cambridge: Polity Press.